Vol 13 (2016) - Issue 4

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Moving Beyond Trust: Voidable Payments Received from Ponzi Schemes

Introduction
For the first time the New Zealand Court of Appeal has considered whether an investor in an elaborate Ponzi scheme is entitled to retain a repayment of their initial deposit and a return on it. The central issue for the Court was what it means to 'give value' under the good faith defence to a liquidator’s claim that a transaction is voidable.
New Zealand’s voidable transaction regime starts with the basic principle that payments to unsecured creditors occurring within a prescribed timeframe prior to liquidation are able to be clawed back by liquidators. There is a positive 'good faith' defence available for creditors who can show that when they received the payment they:
(a) acted in good faith;
(b) did not have reasonable grounds for suspecting the insolvency of the company; and
(c) gave value or altered their position in the reasonably held belief that the payment was valid and would not be set aside.

Our previous article titled 'New Zealand’s Good Faith Defence to Voidable Transactions: Shift in Focus to Creditor’s State of Mind' considered the 2015 Supreme Court decision in Allied Concrete Limited v Meltzer where the Court held, in the context of everyday trade credit arrangements, that 'gave value' could extend to value given at the time the antecedent debt was created. In other words, if goods or services are supplied before payment and no further goods or services are supplied at or after payment, the defence will apply. This was a shift from the commonly understood position (resulting from the apparent literal meaning of the statutory language) that a creditor had to provide new value at the time of repayment.
In McIntosh v Fisk4 the Court of Appeal was tasked with applying the principles of Allied Concrete to a different factual scenario where the recipient of funds from the insolvent estate was not a trade creditor, but an investor in a Ponzi scheme. The outcome of the split decision in McIntosh v Fisk is that an investor seeking to retain amounts paid to them out of a Ponzi scheme is likely to be able to keep the amounts paid up to their initial investment, as that sum represents value provided to the scheme. However, to recover a return on the initial investment (usually fictitious ‘profits’) the investor must show that he or she provided some additional value. At the time of writing this article, both the liquidators and the investor in McIntosh v Fisk have filed for leave to appeal the Court of Appeal decision to the Supreme Court.

Background
In 2007, Mr McIntosh deposited NZD 500,000 with Ross Asset Management Limited ('RAM'). RAM purported to manage client funds deposited with it for investment and was the corporate ego of an accountant, David Ross. If RAM had operated as a proper investment company, Mr McIntosh’s deposit would have been held on trust by RAM as his agent for the purpose of administering and managing his portfolio in accordance with the terms of a written agreement. Instead, RAM operated as a Ponzi scheme. Investors’ funds were largely not invested in securities but, rather, were used to meet RAM’s expenditure, the expenditure of other companies in the RAM group, or for withdrawals sought by other investors.